China Banks to Stress-Test Local Government Loans, Herald Says

China’s banking regulator asked the country’s five largest banks to conduct stress tests on lending to local government financing vehicles and on property loans, the 21st Century Business Herald reported.

The regulator, which held a meeting with large banks Jan. 11-12, is also focusing on wealth management products and shadow banking as areas of potential risk, the newspaper said, citing unidentified people. A total of 14 percent of the five banks’ outstanding loans are to local government financing platforms, according to the Herald.

The banks were asked to examine the systemic risk from the interaction among the four areas and report the results before the end of the first quarter, the newspaper said.

China’s local governments had 10.7 trillion yuan ($1.7 trillion) of debt at the end of 2010, including 8.5 trillion yuan of bank loans, the nation’s auditor said in June. More than 5 trillion yuan of the total matures before 2013. China’s banks should conduct stress tests “regularly” on credit risks and closely monitor cash-flow coverage of loans, Shang Fulin, head of the CBRC, wrote in Caijing Magazine Jan. 16.

The China Banking Regulatory Commission’s press office had no immediate comment on the article.

China’s five biggest banks are Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. (939), Bank of China Ltd. (3988), Agricultural Bank of China Ltd. (601288) and Bank of Communications Co.

To contact Bloomberg News staff for this story: Henry Sanderson in Beijing at hsanderson@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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